Energy Efficient Mortgage(EEM)
I am going to focus primarily on the provisions that relate to purchase transactions for now in the interest of time. The real urgency is to reinvigorate the Stimulus Based programs and the HERE model offers the solution that is so desperately needed in this area. The HERE model is primarily a purchase based approach. I will expand on the refinance considerations with this program in the near future.
The Energy Efficient Mortgage permits a home buyer or someone who is refinancing to include the cost of qualifying Energy Related Upgrades into their loan. Although the program can be used with VA loans, and it can technically be included with FNMA Loans (in theory), it works extremely well with FHA loans. I am going to focus on FHA based financing for now.
| Let’s clear one thing up first; this is a phenomenal program with a very poorly conceived name. Is it any wonder that people think it is a “Mortgage” when it is named the “Energy Efficient Mortgage”? I generally refer to it as the “Energy Efficient Mortgage Enhancement Program” because when you get away from the semantics that is what this is. It is not a different type of Mortgage, it is a program that can be used as an enhancement to the Mortgage they are already getting. |
| It is not a 2nd Loan!!! It is added to the 1st loan and enjoys the same favorable rate and term of the FHA 1st loan product. |
| It is not factored into the appraisal. On a $200,000 sale without an EEM the base loan after the required $7,000 down payment is $193,000 and the property must appraise for at least $200,000. On a $200,000 sale with a $10,000 EEM incorporated, the $10,000 gets added to the $193,000 raising it to $203,000 and the property still must appraise for at least $200,000. |
| It is also excluded from a buyer’s qualifying ratios. In the above scenario the buyer qualifies as if the base loan was still $193,000. Since a HERS II Audit is performed to determine that there is an expectation that the energy savings will be reduced by more than is being added to the Mortgage Payment, this is considered an off-set for qualifying purposes. |
| The maximum dollar amount that can be included in their loan for an EEM is determined by the following criteria. It is the lesser of 5% of:
• The value of the property, or • 115% of the median area price of a single family dwelling, or(I have attached the HUD’s 2011 Median Sales Price figures covering the entire United States and for all California areas. You can go to http://www.hud.gov/offices/hsg/sfh/eem/eemhome.cfm for more complete information.) • 150% of the conforming Freddie Mac limit. (In California the Conforming Freddie Mac limit is $417,000. 5% of 150% of $417,000 is $31,275 by my calculation. This means that $31,275 would be the highest allowable EEM in California even if a higher figure was achieved using one of the other calculations) Please refer to Mortgage Letter 2009-18 which I have included for further information on this. |
| All work is done after the sale has closed. |
| A HERS II Rating must be done. |
| Escrow must hold the EEM funds unless this is combined with a Full 203K or Streamline 203K. (There may be a few Lenders that are set up to hold these funds, but I am not aware of any of them.) |
| There must be a projected monthly energy cost reduction that is equal to or greater than the additional mortgage cost. |
| The amount included for the EEM is not factored into the appraisal. |
| The additional payment amount created by the EEM is not factored into a borrower’s qualifying ratio. |
| Please refer to the document I included that explains the “Stretch Ratio” provision in detail. |
Here are a couple of links to HUD’s information on this program. I will strongly caution you though that you need to be very careful with some of the information there. There are several inaccuracies.
Just a few examples of this;
http://www.hud.gov/offices/hsg/sfh/eem/energy-r.cfm This information states it is current as of January 25, 2011 yet the link to median prices to be used are still the 2010 figures which had been updated prior to January 25th.
http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm This information on the HUD site purports to be current as of June 29, 2010. However it states that the $4,000 floor and $8,000 caps are in effect. HUD removed these in June of 2009 in Mortgagee Letter 2009-18.
This is absolutely not intended to embarrass anyone at HUD in any way. I have worked closely with several people at HUD over the last years and I know how hard they are working to correct and clarify these issues. I just want to ensure that everyone understands that you cannot rely on everything that you read in their information.
Although I have not reviewed the cross reference document at this next link thoroughly, it does appear to be pretty accurate.
http://www.hud.gov/offices/hsg/sfh/eem/eemcrossreferencetips.pdf
Sacramento 1st DBA Comstock Mortgage – Lic : 01390474
Kevin Nunn – NMLS 305826 / DRE 01158674
